McKesson Reports Fiscal 2016 Second-Quarter Results

McKesson Corporation (NYSE:MCK) today reported that revenues for the second quarter ended September 30, 2015 were $48.8 billion, up 10% compared to $44.2 billion a year ago. On a constant currency basis, revenues increased 14% over the prior year. On the basis of U.S. generally accepted accounting principles (“GAAP”), second-quarter earnings per diluted share from continuing operations was $2.65 compared to $2.05 a year ago.

Second-quarter Adjusted Earnings per diluted share was $3.31, up 19% compared to $2.79 a year ago. On a constant currency basis, Adjusted Earnings per diluted share increased 20% over the prior year. Second-quarter results include a pre-tax gain of $51 million, or 14 cents per diluted share, related to the sale of the ZEE Medical business within the Distribution Solutions segment. Second-quarter results also reflect lower than expected tax expense driven by a discrete tax benefit of $25 million, or 11 cents per diluted share.

For the first half of the fiscal year, McKesson generated cash from operations of $1.3 billion, and ended the quarter with cash and cash equivalents of $5.4 billion. During the first half of the fiscal year, McKesson repurchased nearly $500 million of its common stock, repaid $498 million in long-term debt, had internal capital spending of $274 million and paid $114 million in dividends.

At its recent meeting, McKesson’s Board of Directors authorized a new $2 billion share repurchase program.

“McKesson delivered solid results during the first six months of our fiscal year. In addition to the strong operating performance across our businesses in the second quarter, we repurchased approximately 2.5 million shares totaling nearly $500 million, announced the acquisition of the UK pharmacy operations of Sainsbury’s and the acquisition of the pharmaceutical distribution business of United Drug Group in Ireland. At its recent meeting, our Board of Directors also authorized a new $2 billion share repurchase program and we remain exceptionally well positioned to continue to execute our portfolio approach to capital deployment. We were also privileged to be selected by Albertsons as its pharmaceutical sourcing and distribution partner across all of its U.S. brands. I am confident in the strength and scale of our global value proposition for our customers and our manufacturing partners, and I am excited about the opportunities across our diversified portfolio of businesses,” said John H. Hammergren, chairman and chief executive officer.

“We are updating our full-year outlook and now expect Adjusted Earnings per diluted share of $12.50 to $13.00 for the fiscal year ending March 31, 2016,” concluded Hammergren.

Segment Results

Distribution Solutions revenues were $48 billion for the quarter, up 11% on a reported basis and up 14% on a constant currency basis.

North America pharmaceutical distribution and services revenues were $40.6 billion for the quarter, up 16% on a reported basis and 17% on a constant currency basis. North America revenue growth primarily reflects market growth and our mix of business.

International pharmaceutical distribution and services revenues were $5.9 billion for the quarter, down 13% on a reported basis and up 2% on a constant currency basis.

Medical-Surgical distribution and services second-quarter revenues were up 3% for the quarter, driven by market growth.

In the second quarter, Distribution Solutions GAAP operating profit was $926 million and GAAP operating margin was 1.93%. Second-quarter adjusted operating profit was $1.1 billion, up 8% on a reported basis and up 11% on a constant currency basis, primarily driven by growth in our North America pharmaceutical distribution and services revenues and a pre-tax gain of $51 million from the sale of the ZEE Medical business. Adjusted operating margin for the Distribution Solutions segment was 2.39%.

Technology Solutions second-quarter revenues were $721 million, down 6% compared to the prior year, primarily driven by the completed sale of our nurse triage business in our first quarter and by the anticipated year-over-year decline in our hospital software business, partially offset by growth in our other technology businesses.

Technology Solutions GAAP operating profit was $146 million for the second quarter and GAAP operating margin was 20.25%. Adjusted operating profit was $157 million for the second quarter and adjusted operating margin was 21.78%.

Fiscal Year 2016 Outlook

McKesson expects Adjusted Earnings per diluted share between $12.50 and $13.00 for the fiscal year ending March 31, 2016, based on an exchange rate of $1.10 per Euro. The updated full-year outlook reflects a number of items, including the sale of ZEE Medical in the second quarter, the impact of the recently completed $500 million share repurchase program, and a reduction in our full-year adjusted tax rate from 31.5% to 31%, primarily driven by a favorable discrete tax item recognized in the second quarter. The revised guidance range also reflects the expiration of the Optum contract at the start of the third quarter and an assumption that generic pharmaceutical pricing trends will remain weak in the second half of the fiscal year and similar to the level of the second quarter.

The updated outlook for Adjusted Earnings per diluted share between $12.50 and $13.00 excludes the following GAAP items:

• Amortization of acquisition-related intangible assets of $1.25 per diluted share.
• Acquisition expenses and related adjustments of 33 cents per diluted share.
• LIFO inventory-related charges of 89 cents to 99 cents per diluted share.

The Fiscal 2016 guidance range does not include any potential claim or litigation reserve adjustments, or the impact of any potential new acquisitions and divestitures, and impairments or material restructurings.

Adjusted Earnings

McKesson separately reports financial results on the basis of Adjusted Earnings. Adjusted Earnings is a non-GAAP financial measure defined as GAAP income from continuing operations, excluding amortization of acquisition-related intangible assets, acquisition expenses and related adjustments, certain claim and litigation reserve adjustments reflecting changes to the company’s reserves for controlled substance distribution claims and average wholesale price litigation matters, and Last-In-First-Out (“LIFO”) inventory-related adjustments. A reconciliation of McKesson’s GAAP financial results to Adjusted Earnings is provided in Schedules 2, 3 and 4 of the financial statement tables included with this release.

Constant Currency

McKesson also presents its financial results on a Constant Currency basis. The company conducts business worldwide in local currencies, including Euro, British pound and Canadian dollar. As a result, the comparability of the financial results reported in U.S. dollars can be affected by changes in foreign currency exchange rates. Constant Currency information is presented to provide a framework for assessing how its business performed excluding the effect of foreign currency exchange rate fluctuations. The supplemental Constant Currency information of the company’s GAAP financial results and Adjusted Earnings (Non-GAAP) is provided in Schedule 3 of the financial statement tables included with this release.

Risk Factors

Except for historical information contained in this press release, matters discussed may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. These statements may be identified by their use of forward-looking terminology such as “believes”, “expects”, “anticipates”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates” or the negative of these words or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. It is not possible to predict or identify all such risks and uncertainties; however, the most significant of these risks and uncertainties are described in the company’s Form 10-K, Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission and include, but are not limited to: changes in the U.S. healthcare industry and regulatory environment; managing foreign expansion, including the related operating, economic, political and regulatory risks; changes in the Canadian healthcare industry and regulatory environment; exposure to European economic conditions, including recent austerity measures taken by certain European governments; changes in the European regulatory environment with respect to privacy and data protection regulations; foreign currency fluctuations; the company’s ability to successfully identify, consummate, finance and integrate acquisitions; the company’s ability to manage and complete divestitures; material adverse resolution of pending legal proceedings; competition; substantial defaults in payment or a material reduction in purchases by, or the loss of, a large customer or group purchasing organization; the loss of government contracts as a result of compliance or funding challenges; public health issues in the U.S. or abroad; malfunction, failure or breach of sophisticated internal information systems to perform as designed; cyber attacks or other privacy and data security incidents; the adequacy of insurance to cover property loss or liability claims; the company’s failure to attract and retain customers for its software products and solutions due to integration and implementation challenges, or due to an inability to keep pace with technological advances; the company’s proprietary products and services may not be adequately protected, and its products and solutions may be found to infringe on the rights of others; system errors or failure of our technology products and solutions to conform to specifications; disaster or other event causing interruption of customer access to data residing in our service centers; the delay or extension of our sales or implementation cycles for external software products; changes in circumstances that could impair our goodwill or intangible assets; new or revised tax legislation or challenges to our tax positions; general economic conditions, including changes in the financial markets that may affect the availability and cost of credit to the company, its customers or suppliers; changes in accounting principles generally accepted in the United States of America; and withdrawal from participation in multiemployer pension plans or if such plans are reported to have underfunded liabilities. The reader should not place undue reliance on forward-looking statements, which speak only as of the date they are first made. Except to the extent required by law, the company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events.

The company has scheduled a conference call for 8:30AM ET. The dial-in number for individuals wishing to participate on the call is 719-234-7317. Erin Lampert, senior vice president, Investor Relations, is the leader of the call, and the password to join the call is ‘McKesson’. A replay of this conference call will be available for five calendar days. The dial-in number for individuals wishing to listen to the replay is 719-457-0820 and the pass code is 752390. A webcast of the conference call will also be available live and archived on the company’s Investor Relations website at http://investor.mckesson.com.

Shareholders are encouraged to review SEC filings and more information about McKesson, which are located on the company’s website.

About McKesson Corporation

McKesson Corporation, currently ranked 11th on the FORTUNE 500, is a healthcare services and information technology company dedicated to making the business of healthcare run better. McKesson partners with payers, hospitals, physician offices, pharmacies, pharmaceutical companies and others across the spectrum of care to build healthier organizations that deliver better care to patients in every setting. McKesson helps its customers improve their financial, operational, and clinical performance with solutions that include pharmaceutical and medical-surgical supply management, healthcare information technology, and business and clinical services. For more information, visit http://www.mckesson.com.